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It boils down to the leverage ratio.

Who, exactly, is Ralph Block? He's a leading expert on REITs, having literally written the book on investing in them: The fourth edition of his Investing in REITs is in the works right now. He's also a former co-manager of the Undiscovered Managers REIT fund, and has been personally investing in REITs for more than 40 years.

At the end of January, I interviewed Ralph on a variety of REIT-related topics, including his favorite and least favorite stocks in the space right now. What follows is an edited portion of our conversation.

Brian Richards: So how about one or two REITs that you dislike, or you think are just overpriced?

Ralph Block: Well, I can't say any that I really dislike simply because if I dislike them, I just stop following them. So it's hard for me to do that, but there's one -- I tend to follow a wide spectrum either closely or not so closely, but there's one that I did own for a while, and I think the management is OK. Usually when I dislike a REIT, I dislike the management team.

But this one is called CBL & Associates Properties(NYSE: CBL), and it's performed pretty well, actually. But what I don't like about it is that it has a pretty heavy leverage ratio -- over 70%, which I think is not a good place to be these days. The stock's trading at about a 20% premium over net asset value, and I think their earnings are going to be pretty flat over the next couple of years.

That goes with one theme that I'm seeing in forecasting -- that we seem to be having a greater separation of the haves versus the have-nots in terms of the American consumer. You look at the unemployment rates; they're very high for people without a college education. With a college education, the unemployment rate's only about 5%.

And so you see luxury brand names -- Tiffany's and Coach and guys like that -- they're doing well with retail sales, but people who are not serving that high-end segment are not doing so well. And so when I look out and see what kind of retail REITs I like, I would much prefer to be in those that are in the most productive malls and the most productive locations, that are serving moderate- to higher-end consumers. And CBL isn't there. They're in kind of secondary markets and so you know, I don't see them recovering to the extent that some of the other retail properties will.

Author

Now: I work on global strategy for The Motley Fool with a focus on Canada, Europe, and South America. Former: Managing Editor of Fool.com. The longer version: http://www.linkedin.com/pub/brian-richards/31/164/461/.